An account that receives all the temporary accounts upon closing them at the end of every accounting period
The income summary account is an account that receives all the temporary accounts of a business upon closing them at the end of every accounting period. This means that the value of each account in the income statement is debited from the temporary accounts and then credited as one value to the income summary account.
There are two sides to the income summary account: the credit and debit sides. A company is said to have made profits if the credit side is higher than the debit side, while losses have been incurred if the debit side is higher than the credit side.
After all temporary accounts have been transferred to the income summary account, the balance in each temporary account will be closed and transferred to the capital account for a sole proprietorship or to “retained earnings” for a corporation.
Many people become confused between income summary and income statement since both concepts provide a report of the nets and losses of a company. However, the two are different, and the following points are some of their differences:
When closing the accounts in the income statement, accountants can choose to close them directly and transfer the values to the retained earnings account or transition them to the income summary account before finally transferring them to the retained earnings account. Let us discuss how to do the latter.
Let’s say Company ZED is closing the accounting period and will need to transfer the values in its income statement onto the income summary account. Consider the following table:
Period ending June 30 | |
Total Revenue | $5,000 |
Expenses | $1,000 |
– Utilities
– Rent – Insurance |
$300
$500 $200 |
The table above contains the values of the revenue and expenses and will be transferred to the income summary account. Each value will be debited and then credited to the account as one value, as shown below:
Total Expenses | $1,000 |
Income Summary (Revenue – Expenses) | $4,000 |
After the accounts are closed, the income summary is then transferred to the capital account of the owner and then closed.
Income Summary | $4,000 |
Capital Account for June 30 | $4,000 |
It is true that revenues and expenses can be transferred directly onto the balance sheet – whether it means putting the values into the retained earnings account or into the capital account. However, transitioning it first into the income summary helps provide an audit trail that will show the company’s net, expenses, and revenue for the year.
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